Indonesia, China take securitization route to infrastructure finance

Big questions remain around how China’s ambitious Belt and Road Initiative will be financed. But experts tell GlobalMarkets the answer, or at least part of it, may be in asset-backed securitization — with Indonesia making some headway recently and China gearing up for some action.

Pakpahan: infrastructure financingAsset-backed securities will be key to unlocking the multi-billion dollars of funding needed to finance the Belt and Road Initiative because of the huge opportunities the projects offer to securitize long term revenues, according to leading financial market experts.

“ABS can absolutely be used towards Belt and Road projects,” Henrik Raber, global head of capital markets and co-head of the capital structuring and distribution group at Standard Chartered, told GlobalMarkets. “Toll roads, airports or landing rights can be securitized. You can also securitize airplane ticket sales. There have been deals where there is securitization of shipping containers.

“When you go into securitization, there is huge opportunity, including new technologies in renewable energy as an example [where] solar projects can be securitized.”

However, China, which is the sponsor of the Belt and Road vision, has an under-developed financial market and has not yet launched any ABS deal to fund infrastructure projects.

But Raber said conversations were taking place and that it would only be a matter of time before the market kicked off. One Asian country with enormous infrastructure requirements is Indonesia, with the country’s government estimating that around $500bn in infrastructure investment will be needed in the next five years.

Indonesia in the lead

Around 18%-20% of the Indonesian state budget has been dedicated towards infrastructure, Robert Pakpahan, director general in the budget financing and risk management team at the country’s ministry of finance, told GlobalMarkets. The country also uses private sector funding as well as local and international bond issuance to fund infrastructure development.

But some of the country’s state-owned companies have taken it a step further. Toll road operator Jasa Marga became the first to sell an ABS deal on the Indonesian exchange in August, to go towards building more toll roads. It was followed by Perusahaan Listrik Negara, which raised Rph4tr last month for infrastructure financing.

Ari Soerono, president director and chief executive of Indonesia Infrastructure Finance, said ABS was a good investment product for investors that did not have a high risk appetite, like pension funds and insurance funds. “A lot of Indonesian state-owned enterprises (SOEs) are looking at it,” he told GlobalMarkets.

“The SOEs understand they need to recycle capital as their leverage is coming to an unsustainable level. So selling ABS is not something that is being forced on them. They realise they need to do this.”

Raber added that ABS deals fitted well when the bank market was not deep enough to provide the financing for projects. In China, the bank market is very liquid, but securitization still offers a huge opportunity.